Common Rollover IRA Mistakes You’ll Want to Avoid

rollover iraRollover IRA conversions are very popular. Whenever you think you might be able to make higher returns with a different company, have more investment options or want better customer service, you might consider rolling over your IRA to another account. However, along with the popularity of rolling an IRA over, there are several common mistakes that cause IRA account owners to incur penalties and taxes that they could have otherwise avoided.

Having an adequate understanding of the rollover IRA rules as set forth by the Internal Revenue Service can save you a lot of headaches and stress. In addition, avoiding these mistakes can help you reach your retirement savings goals on time. Before you can prevent yourself from breaking the retirement account rollover rules, you have to understand them. Here is a glance at those rules so you can be an informed investor.


The Rollover IRA 60-Day Deadline:

Once you receive your funds from your current IRA account, you have 60 days to finalize the rollover into your new account. You can request an extension or waiver through the IRS, but if you do not receive one, and you don’t complete your transaction within the 60-day time period, you will be taxed on the amount you withdrew.

This means you will be required to report the amount you failed to roll over as income on your yearly tax return and you will have to pay income tax on the amount according to your current income tax rate. In addition, if you are not yet 59 1/2 years old, you will also have to pay a 10 percent penalty for withdrawing the money early.


The One-Year Waiting Period:

You can only roll over your IRA assets once per year. You have to wait 12 full months after you roll over any amount from one IRA account to another before you are allowed to initiate another IRA rollover. For instance, if you have two IRAs and you roll over a portion of your first IRA to a third IRA, you will not be allowed to roll over any other funds from your first IRA for 12 full months. You can, however, choose to roll over any portion of your second IRA if you choose to do so.

This rule does not apply to a 401k or other employer plans that are rolled over to an IRA account. You are eligible to roll over as many employer-sponsored accounts as you would like without waiting for 12 months to pass. You can also roll over a traditional IRA to a Roth IRA without abiding by the one-year waiting period.


The Same Property Rule:

ira rolloverAny amount you roll over from one IRA to another IRA must be of the same property. This means you are unable to use cash distributions from one IRA to buy other assets with the cash, like company stock or real estate, and roll those assets over into another IRA. If you make this mistake, you will be required to pay income tax on the amount you withdrew from the original IRA. You will also be hit with a 10 percent early-withdrawal penalty if you are younger than 59 1/2 years old.


Taxes on a Traditional to Roth!

Don’t forget!  If you rollover funds from a traditional 401k or IRA into a Roth IRA, you will have to pay the taxes for those funds for the calendar year that the rollover was performed.  That could be one very hefty tax bill!

For example: Let’s say you’re in the 25% tax bracket.  Suppose you rollover $100,000 from your old 401k into a Roth IRA.  That means unfortunately that you’d be liable for $25,000 in taxes due that year – out of pocket!

A rollover IRA can boost your retirement savings if you do it correctly. However, the pitfalls mentioned here can make a simple rollover a big problem, so it is best to ensure you follow all the IRA rollover rules before you initiate the process. Educate yourself and make sure you are enhancing your retirement with your rollover. Your future retired self will appreciate it.


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  1. Erik says

    Regarding the same property requirement in a rollover of cash from one IRA to another IRA, can you rollover the same amount of cash from your bank account to the new IRA before you deposit the proceeds from the old IRA in your bank account? The idea would be to keep your money invested in the market while you complete a rollover from one IRA to another.

  2. Jason says

    I have a 401k that I want to eventually move into a traditional IRA. I would actually like move them into cd’s (trad IRA). The challenge I have is the amount is more than 250k them max insured by fdic. I no longer work for the company so I can definitely convert. But am I affected by that same property rule, by trying to split my 401k to 2 different banks? Also the am I affected by the maximum 1 transfer rule per year rule, since I would be doing 2 transfers from the same 401k. I have been told I cannot do the split with it as a 401k, the company doesn’t allow that, so I don’t know if I have to transfer it all to a bank, then have them send the half to a second bank or what. Seems really complicated.

  3. Kirk says

    Do you have any insight on a 401K Rollover that includes stock. I was told there is something called Net Unrealized Value of stock you can take advantage of. In my case, I have $100K in stock that has original value of $12K. Can I move the stock over so that it gets taxed at capital gains tax rate vs. regular taxes. I’d also like to take some money out for parent’s medical expenses (of course, knowing I’d have to pay 10% penalty).


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